Oiled Machine

They say there's a third-generation curse in family-run businesses. An heir to Murphy Oil overcame it.

Claiborne Deming grew up thinking he wouldn't go into the family business, but there was just too much oil in his genes. His granddad got into oil production investments in 1907. Then, after World War II, his uncle Charles H. Murphy Jr. expanded the partnerships into what became known as Murphy Oil. Deming took over as chief executive in late 1994, succeeding two nonfamily chief executives and becoming the first third-generation family member to run the company.

The surprising outcome: Deming has turned a struggling outfit into one of the fastest-growing oil producers in the country. Murphy Oil's revenues have more than doubled since 1994, to $4.5 billion, and earnings hit $331 million last year. He's been good for shareholders: The stock has risen 175% during his tenure, to a recent $99. And meanwhile he's been a miser about his own pay, earning (on average, over six years) a mere $1.2 million annually, a rounding error for chief execs these days, (see table).

And a guy we've designated one of America's best bosses. Deming, 47, is happy to spread the praise. "I have no monopoly on the brains," he says, sitting in his office at Murphy's headquarters in El Dorado, a quaint oil town of 23,000 in southern Arkansas. "I work with some of the best people in America."

But Deming also had the foresight to pump up exploration and solidify the retail business. On his watch, reserves of crude oil and natural gas have increased at a compounded 8% rate since 1996, while production has grown at only a 5% clip, to 125,000 barrel equivalents a day. Through 2004, production should increase at a compounded 15%, four times greater than its peer-group average, estimates Bank of America analyst Tyler Dann.

Deming, whose straightforward manner is reminiscent of Tom Hanks' delivery in Forrest Gump, thought he would be a lawyer. But 1979, when he graduated from Tulane University law school, was "a great year for the oil business," he recalls. He asked his uncle for a job and started in the law department. After working in various parts of the company, he was appointed chief operating officer in 1988.

His first full year as chief, 1995, was an awful one for oil prices. Murphy posted a $119 million loss. Deming credits his predecessor, Jack W. McNutt, with laying the groundwork for some of the current successes. McNutt sold off a contract drilling business and other assets in the early 1990s and used $400 million from the sale to buy stakes in high-quality oil projects--at distressed prices.

But Deming knew that rising asset prices would make an acquisition strategy dicier. "We were going to have to grow the way Murphy has historically grown--by the drill bit." That means doing its own exploration, not buying working oilfields. Murphy bought leases in the Gulf of Mexico, off the east coast of Canada and off Malaysia in the South China Sea.

Deming is opening the company's wallet for $40 million this year to find oil in the 4-million-acre Malaysia concession, which abuts one held by Royal Dutch/Shell. That's a big stretch for Murphy, which has a $4 billion market capitalization, compared with Royal Dutch's $109 billion. But the payoff could be huge. "We're small enough that if you find something, it really impacts you."

Deming has transformed Murphy's downstream business as well. Murphy Oil has gas stations in the parking lots of 404 Wal-Mart stores across the Midwest and the South. Deming figures Murphy will build 100 stations a year for the next five years, making it the fastest-growing gasoline chain in the country. That has stabilized profits a bit, since retail prices are stickier than wholesale prices. Refining and marketing accounts for 32% of Murphy's profit before interest and taxes.

Deming sums up his operating philosophy in three rules: Don't buy assets at the top; watch your costs at all times; and keep your investment program steady.

Murphy's integration can't shelter it from price swings. The first quarter this year was the worst in a decade for its refining and marketing business. Natural gas and crude oil prices rose, but retail prices did not keep up. As a result Bank of America predicts that earnings for 2002 will be $2.94 a share, down from $5.78 last year.

Deming has seen dramatic drops in oil and gas prices before, so he's learned to stay cool. "In this business, growth is hard to achieve," he says--then smiles. "We've been very fortunate."